Walking the Straight and Narrow
Will one or two bad apples spoil the bunch of companies offering extended vehicle service contracts?
The plight of US Fidelis has put the extended service industry under the heat lamp, to the point where an industry trade group has blasted the company and applauded the arrest of its founders.
The bigger issue is what will become of the companies offering extended vehicle service contracts and the commissions and revenue those companies are paying to car lenders and dealers for referrals.
There is little doubt that auto lenders, especially those offering loans at the bottom end of the credit spectrum, have made a lot of money referring business to companies like US Fidelis. And, luckily for auto lenders, nobody seems to be asking which lenders were referring business to US Fidelis.
Lenders have left a trail of lawsuits and legislation in their constant attempts to find new ways to generate revenue. Remember dealer reserves? Predatory lending ring any bells?
It seems as though there is a constant cycle for lenders to find a way to extract every last dime from a consumer when selling them a car or lending them the money to do so. Why hasn’t the industry learned that these kinds of arrangements never work out in the long run? Sure, they may make money today and tomorrow, but is it worth the risk of being the prime attraction at a perp walk in six months or a year from now?
Bad facts make bad laws. I was speaking with a banker recently who was lamenting the implementation of “The Durbin Amendment” as it pertains to debit interchange fees. The banker did some back-of-the-envelope calculations and came up with a multi-billion dollar figure that banks were going to be out as a result of this change. The banker hoped that, over time, the pendulum would swing back and banks would once again be freer to determine their own future.
If the auto finance industry wants to stay out of the legislative cross-hairs, then arrangements with unscrupulous companies or companies in unscrupulous industries should be considered toxic. It may be a short-term loss, but it will result in a long-term gain.
